There are two things I know about hydrogen: 1) It’s explosive. 2) It’s existed for 13 billion years. But holders of fuel-cell wunderkind Plug Power (NASDAQ:PLUG) have experienced hydrogen’s burn firsthand. So, here’s a rundown of the story behind PLUG stock — and where it can go from here.
Over the past 12 months, PLUG rocketed from $4 to over $73 — before falling back down again to around $26. Despite the meteoric rise and fall, PLUG’s 12-month return on equity (ROE) is -68%, for anyone counting.
With all the hype surrounding renewable energy, investors who want to play in this space without getting burned need to separate the stock from the story.
PLUG Stock: A Forklift Company With Green Vibes
The dream is the best part of the Plug Power story. Envision a world where hydrogen makes everything “go.” Earth-loving investors will appreciate the abundance of positive vibes and the absence of greenhouse gasses. After all, hydrogen really does work. And in many ways, it beats legacy tech. Fuel cells offer a longer range than battery electric vehicles, twice the fuel efficiency of diesel engines, lighter and smaller footprints than batteries, and faster refuel times.
With all the positive feels, it’s no surprise PLUG stock talks a big game. The company’s 2024 revenue forecast of $1.7 billion is a 7x increase from 2019 levels. But here’s the reality. PLUG’s 2020 revenues clocked in at negative $230 million (a loss caused by vesting of company-issued warrants). And, how the company wants to make money and how it actually does are two different things. Despite the vision of a green economy, in practice, the company’s revenues are generated almost entirely from its Materials Handling business. This segment makes fuel cells for forklifts.
E-commerce is triggering a logistics boom, which is why bulls think PLUG’s fuel-cell tech can capture a big chunk of the $30 billion warehouse automation market. For its part, PLUG forecasts $750 million in sales for this division by 2024, bolstered by a marquee list of retailer customers, including Amazon (NASDAQ:AMZN), Home Depot (NYSE:HD), Walmart (NYSE:W) and Lowes (NYSE:LOW).
While it’s not the sexiest application for fuel cells, it does make sense — mainly because it offers two legitimate advantages over legacy tech: 1) 2x the fuel efficiency of diesel engines and 2) reduced downtime (only a few minutes), versus several hours of recharge for old-time battery systems.
The Economics Don’t Work
PLUG’s customers may be motivated. But the company still needs to scale its technology — cost-efficiently — before it can get anywhere close to its forecasts. Trouble is, hydrogen is still more expensive than old-school alternatives. Because hydrogen isn’t naturally occurring, you still need traditional energy to produce it. Most hydrogen, called “blue hydrogen,” is still made through steam methane reforming (SMR), which involves a tremendous amount of natural gas production (and carbon).
PLUG says the economics are about to change. The vision: Make zero-carbon-footprint hydrogen — that is, produce green hydrogen purely through renewable electric power. To do this, it uses proton exchange membrane electrolyzers — equipment that splits water into hydrogen and oxygen. PLUG is working on making this tech more efficient. But we’re not there yet.
Despite the hype around hydrogen’s declining cost curve, the cost still needs to come down by over 50% to $2 to $2.50/kg by 2030 to make hydrogen a viable alternative to conventional fuels. Bottom line: Hydrogen is still too expensive and too inefficient to produce, store, transport and burn in a profitable way.
Zero-Footprint Hydrogen Is Still Light Years Away
When a demand curve is linked to a manufacturing curve that doesn’t exist yet, it creates a chicken-and-egg situation. Large-scale green energy production is still years away. But it’s necessary before PLUG can capture its second big opportunity — data center backup.
Like green forklifts, green data centers make sense and offer sustainable advantages: better storage (batteries leak, hydrogen doesn’t) and a reduced carbon footprint. But that doesn’t mean PLUG stock can win the market. There’s that chicken-and-egg problem again: scale. In reality, it’s impossible to outfit a data center entirely with fuel cells. Neither PLUG — nor any fuel-cell manufacturer, for that matter — can even make enough fuel cells to do that.
We can maintain a fuel-cell-operated data center for short periods, like Microsoft (NASDAQ:MSFT) did for 48 hours. But powering a data center at every hour of the day with carbon-free sources of energy requires utility-scale green energy production. A fully green data center would be powered by a local grid with renewable power that could be stored for later, when the sun isn’t shining or the wind isn’t blowing. To do this, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google and Amazon are building their own sources of renewable energy directly next to their data centers.
Large-scale hydrogen production is really, really far away. So far, PLUG has built five green hydrogen plants in the U.S. And there isn’t any real infrastructure to distribute that green power to customers. Remember elementary school science: Hydrogen is explosive. We still don’t have scalable tools for compression, transportation, distribution and conversion.
Dilution and Profitability Matter
Because PLUG lacks the manufacturing scale necessary to support its revenue growth and profitability, it’s had to rely heavily on the issuance of new debt and equity to fund its losses. These capital infusions are dilutive to shareholders. PLUG’s share count is up almost 170% from 216 million in 2017 to 589 million currently.
The latest: a $1.5 billion investment from South Korean conglomerate SK Holdings, announced in January, and a $750 million equity offering last November. The company has also issued warrants to large warehouse customers Amazon and Walmart. At the end of 2020, Amazon had around 35 million warrants at a cost basis of roughly $1.20 per share, with another 20 million to vest over the next few years. Even at the current price of PLUG stock, that’s billions of dollars of equity without much revenue to show for it.
Plug Power’s path to profitability also looks like a stretch. Aside from the obvious high cost of manufacturing, its contracts also include service and refueling agreements that consistently result in negative gross profits. To help its push toward profitability, the company has modeled for a decline in operating expenses from 30% of sales in 2019 to 10% of sales by 2024. These reductions should generate positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $200 million. But those cuts seem counterintuitive in a capital intensive business that’s trying to ramp.
A Good Story, a Bad Stock
I love the PLUG story. The company is leveraging its fuel-cell technology to drive the future of energy from every angle imaginable. But the bottom line is this: Fuel cells aren’t a viable business opportunity. At least not yet.
In the long run, the massive list of green energy applications will boil down to those ideas that work efficiently and cost effectively. Hydrogen will no doubt play a role in the future of energy production and consumption, but how big that role is will depend on the numbers.
No one has the answers. And at a whopping 30x forward sales, there are simply too many questions.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.